I believe that 2017 will turn out to be a break-out year for Exxon Mobil (NYSE:XOM) as a combination of higher oil pricing and an increase in low-cost production will help the company deliver strong revenue growth. More importantly, as Exxon ramps up its production from its low-cost assets, it will witness a rise in its bottom line performance over the long run. As a result, investors can expect Exxon Mobil to deliver gains on the stock market both in the short and the long run.
Why Exxon is geared to deliver short-term gains?
In 2017, the price of oil is likely to hit $60 per barrel. At this price point, Exxon's production from new assets that it is bringing online will add substantially to its bottom line performance. More specifically, Exxon is set to fully ramp-up 450,000 boepd of low-cost production this year, which is expected to achieve break-even at an oil price of only $40 per barrel.
Due to a low cost base and a possible increase in oil prices after the production cut decisions taken by the OPEC and non-OPEC producers, Exxon will witness a major boost in its revenue and earnings. For instance, if oil prices average $60 per barrel this year, Exxon's revenue growth from its new production of 450,000 boepd will be as much as $9.9 billion on an annual basis.
On the other hand, Exxon's existing production of 2.2 million barrels per day will also play a role in boosting its overall revenue as the company will enjoy a higher average realized price this year as compared to 2016. This is because in 2016, the average Brent oil price stood at $46 per barrel, while in 2017, the price is already close to $57 per barrel. Due to this increase in the average price and the addition of low-cost production, Exxon's revenue is expected to rise substantially in 2017.
More specifically, analysts anticipate Exxon's revenue to rise 34% in 2017 to $312 billion as compared to $232 billion last year. Now, Exxon currently has a price to sales ratio of 1.64 due to a market capitalization of $367 billion. Assuming that the company's price to sales ratio remains intact and it is able to achieve its sales target this year, its market capitalization will increase to $511 billion.
This indicates that in 2017, Exxon Mobil's market capitalization could rise as much as 40% as compared to 2016 levels considering the potential growth in the top line. Therefore, driven by an increase in the production and a rise in oil prices, Exxon's top line will rise significantly in 2017, which will eventually lead to strong stock price growth.
Long-term earnings growth will be another stock price catalyst
As discussed above, Exxon will witness growth in its revenue due to higher oil pricing and the addition of production from low-cost assets. The combination of both these factors will also play a crucial role in enhancing the company's bottom line performance.
In fact, as oil prices get stronger over the long run, Exxon will witness further growth in its earnings profile. This is because the returns from the low-cost production that Exxon is adding will get even better as the price of oil increases. As already mentioned, in a $40 per barrel oil price scenario, all of Exxon's new production will achieve break-even. Now, as the price rises to $80 per barrel, Exxon will be able to generate 100% internal rate of return from its new production.
This is the reason why analysts expect Exxon to deliver robust earnings growth in the long run, clocking an annual growth rate of 18.5% until 2020. For instance, by the end of 2018, Exxon's earnings per share are expected to grow to $5.03 per share as compared to projected EPS of $2.19 per share this year.
This means that Exxon's earnings are expected to more than double in the next two years, and this will have a positive impact on the company's stock price given its trailing P/E ratio of around 40. But, as Exxon's earnings rise, its P/E ratio will decline and should come close to the anticipated forward P/E ratio of 22, which will result in a stock price of $110 per share in the next two years (since earnings will grow to $5.03 per share) as compared to the current stock price of around $88 per share.
More importantly, Exxon's earnings performance could be even better going forward as analyst J Marshall Adkins, who had correctly predicted the rebound in oil prices last year, believes that the commodity's pricing will increase to more than $80 per barrel due to lower supply. According to a report:
"West Texas Intermediate will average $80 per barrel by the end of next year," said Adkins of Raymond James in a note to clients, as reported by Bloomberg. The figure is higher than all but one of the 31 analysts surveyed by Bloomberg, who sees West Texas Intermediate at $82 per barrel next year. However, in the longer run, Raymond James' analysts see WTI prices moderating to about $70 per barrel.
Hence, due to an increase in the price of oil, Exxon's earnings will get even better and the company can deliver more upside than forecasted above.
Exxon Mobil has delivered steady gains in the past one year, but it won't be surprising if the company is able to record stronger growth on the market in 2017 in light of the points discussed above. Hence, I believe that investors should continue to hold Exxon Mobil as the company is primed for more gains both in the short- and the long-run.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.